##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File number 000-51358





Kenexa Corporation

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Pennsylvania                                                   |  | 23-3024013                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|650 East Swedesford Road, Wayne, PA      |  | 19087     
|(Address of Principal Executive Offices) |  | (Zip Code)

Registrants Telephone Number, Including Area Code: (610) 971-9171





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x    Accelerated filer   ̈    Non-accelerated Filer   ̈    Smaller
reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x

On May 8, 2008, 22,529,537 shares of the registrants Common Stock, $0.01 par value, were outstanding.









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##### Table of Contents

Kenexa Corporation and Subsidiaries

FORM 10-Q

Quarter Ended March 31, 2008

Table of Contents



|                                                                                                       |  |     
|------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                       |  | Page
|PART I: FINANCIAL INFORMATION                                                                          |  |     
|Item I: Financial Statements (unaudited)                                                               |  |     
|Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007                     |  | 3   
|Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)   |  | 4   
|Consolidated Statements of Shareholders Equity as of March 31, 2008 (unaudited) and December 31, 2007 |  | 5   
|Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)   |  | 6   
|Notes to Consolidated Financial Statements (unaudited)                                                 |  | 7   
|Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 21  
|Item 3: Quantitative and Qualitative Disclosures about Market Risk                                     |  | 34  
|Item 4: Controls and Procedures                                                                        |  | 34  
|PART II: OTHER INFORMATION                                                                             |  |     
|Item 1: Legal Proceedings                                                                              |  | 35  
|Item 1A: Risk Factors                                                                                  |  | 35  
|Item 2: Unregistered Sales of Equity Securities and Use of Proceeds                                    |  | 35  
|Item 3: Defaults Upon Senior Securities                                                                |  | 36  
|Item 4: Submission of Matters to a Vote of Security Holders                                            |  | 36  
|Item 5: Other Information                                                                              |  | 36  
|Item 6: Exhibits                                                                                       |  | 36  
|Signatures                                                                                             |  | 37  
|Exhibit Index                                                                                          |  | 38  



2



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##### Table of Contents

PART I FINANCIAL INFORMATION

Item 1: Financial Statements

Kenexa Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                    |  |               |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                    |  | March 31,2008 |         |   | December 31,2007 |  
|                                                                                                                                    |  | (unaudited)   |         |   |                  |  
|Assets                                                                                                                              |  |               |         |   |                  |   |         |  
|Current Assets                                                                                                                      |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                           |  | $             | 39,378  |   |                  | $ | 38,032  |  
|Short-term investments                                                                                                              |  |               | 7,489   |   |                  |   | 58,423  |  
|Accounts receivable, net of allowance of doubtful accounts of $1,235 and $761                                                       |  |               | 33,476  |   |                  |   | 31,893  |  
|Unbilled receivables                                                                                                                |  |               | 4,010   |   |                  |   | 2,423   |  
|Income tax receivable                                                                                                               |  |               | 917     |   |                  |   | 2,008   |  
|Deferred income taxes                                                                                                               |  |               | 2,626   |   |                  |   | 2,399   |  
|Prepaid expenses and other current assets                                                                                           |  |               | 5,113   |   |                  |   | 3,356   |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total Current Assets                                                                                                                |  |               | 93,009  |   |                  |   | 138,534 |  
|Long-term investments                                                                                                               |  |               | 21,263  |   |                  |   |        |  
|Property and equipment, net of accumulated depreciation                                                                             |  |               | 21,023  |   |                  |   | 17,620  |  
|Software, net of accumulated amortization                                                                                           |  |               | 2,412   |   |                  |   | 1,557   |  
|Goodwill                                                                                                                            |  |               | 175,600 |   |                  |   | 173,502 |  
|Intangible assets, net of accumulated amortization                                                                                  |  |               | 9,346   |   |                  |   | 10,134  |  
|Deferred financing costs, net of accumulated amortization                                                                           |  |               | 588     |   |                  |   | 663     |  
|Other assets                                                                                                                        |  |               | 6,020   |   |                  |   | 5,879   |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                        |  | $             | 329,261 |   |                  | $ | 347,889 |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|                                                                                                                                    |  |              
|Liabilities and Shareholders Equity                                                                                                |  |               |         |   |                  |   |         |  
|Current liabilities                                                                                                                 |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                    |  | $             | 5,261   |   |                  | $ | 5,812   |  
|Notes payable, current                                                                                                              |  |               | 40      |   |                  |   | 49      |  
|Commissions payable                                                                                                                 |  |               | 969     |   |                  |   | 1,025   |  
|Accrued compensation and benefits                                                                                                   |  |               | 5,449   |   |                  |   | 8,363   |  
|Other accrued liabilities                                                                                                           |  |               | 4,870   |   |                  |   | 6,298   |  
|Deferred revenue                                                                                                                    |  |               | 37,481  |   |                  |   | 35,076  |  
|Capital lease obligations                                                                                                           |  |               | 110     |   |                  |   | 140     |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                           |  |               | 54,180  |   |                  |   | 56,763  |  
|                                                                                                                                    |  |              
|Capital lease obligations, less current portion                                                                                     |  |               | 73      |   |                  |   | 94      |  
|Notes payable, less current portion                                                                                                 |  |               | 65      |   |                  |   | 73      |  
|Deferred income taxes                                                                                                               |  |               | 4,632   |   |                  |   | 3,246   |  
|Other liabilities                                                                                                                   |  |               | 74      |   |                  |   | 65      |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                   |  |               | 59,024  |   |                  |   | 60,241  |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Commitments and Contingencies                                                                                                       |  |               |         |   |                  |   |         |  
|                                                                                                                                    |  |              
|Shareholders Equity                                                                                                                |  |               |         |   |                  |   |         |  
|Preferred stock, par value $0.01; 100,000 shares authorized; no shares issued or outstanding                                        |  |               |        |   |                  |   |        |  
|Common stock, par value $0.01; 100,000,000 shares authorized; 22,821,730 and 24,032,446 shares issued and outstanding,
respectively |  |               | 228     |   |                  |   | 240     |  
|Additional paid-in-capital                                                                                                          |  |               | 270,552 |   |                  |   | 291,942 |  
|Accumulated other comprehensive income                                                                                              |  |               | 624     |   |                  |   | 1,407   |  
|Accumulated deficit                                                                                                                 |  |               | (1,167  | ) |                  |   | (5,941  | )
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total shareholders equity                                                                                                          |  |               | 270,237 |   |                  |   | 287,648 |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                          |  | $             | 329,261 |   |                  | $ | 347,889 |  
|                                                                                                                                    |  |               |         |   |                  |   |         |  

See notes to consolidated financial statements.



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Kenexa Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)



|                                                                       |  |                             |            |      |   |           
|---------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ----------
|                                                                       |  | Three Months EndedMarch 31,
|                                                                       |  | 2008                        |            | 2007
|Revenue:                                                               |  |                             |            |      |   |           
|Subscription                                                           |  | $                           | 39,156     |      | $ | 34,687    
|Other                                                                  |  |                             | 9,051      |      |   | 7,530     
|                                                                       |  |                             |            |      |   |           
|Total revenue                                                          |  |                             | 48,207     |      |   | 42,217    
|Cost of revenue                                                        |  |                             | 13,105     |      |   | 11,432    
|                                                                       |  |                             |            |      |   |           
|Gross profit                                                           |  |                             | 35,102     |      |   | 30,785    
|                                                                       |  |                            
|Operating expenses:                                                    |  |                             |            |      |   |           
|Sales and marketing                                                    |  |                             | 9,889      |      |   | 8,230     
|General and administrative                                             |  |                             | 11,993     |      |   | 9,672     
|Research and development                                               |  |                             | 4,542      |      |   | 4,323     
|Depreciation and amortization                                          |  |                             | 2,151      |      |   | 1,430     
|                                                                       |  |                             |            |      |   |           
|Total operating expenses                                               |  |                             | 28,575     |      |   | 23,655    
|Income from operations                                                 |  |                             | 6,527      |      |   | 7,130     
|Interest income, net                                                   |  |                             | 641        |      |   | 123       
|                                                                       |  |                             |            |      |   |           
|Income from operations before income taxes                             |  |                             | 7,168      |      |   | 7,253     
|Income tax expense                                                     |  |                             | 2,394      |      |   | 2,558     
|                                                                       |  |                             |            |      |   |           
|Net income                                                             |  | $                           | 4,774      |      | $ | 4,695     
|                                                                       |  |                             |            |      |   |           
|Basic net income per share                                             |  | $                           | 0.20       |      | $ | 0.20      
|Weighted average shares used to compute net income per share  basic   |  |                             | 23,413,071 |      |   | 24,047,807
|                                                                       |  |                            
|Diluted net income per share                                           |  | $                           | 0.20       |      | $ | 0.19      
|Weighted average shares used to compute net income per share  diluted |  |                             | 23,649,027 |      |   | 24,479,548

See notes to consolidated financial statements.



4



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Kenexa Corporation and Subsidiaries

Consolidated Statements of Shareholders Equity

(in thousands)



|                                                          |  |             |     |   |                          |   |         |                      |  |   |                                      |   |  |                          |       |   |                     |   |         |   |  |   |        |  
|--------------------------------------------------------- |  | ----------- | --- | - | ------------------------ | - | ------- | -------------------- |  | - | ------------------------------------ | - |  | ------------------------ | ----- | - | ------------------- | - | ------- | - |  | - | ------ | -
|                                                          |  | Commonstock |     |   | Additionalpaid-incapital |   |         | Accumulated(deficit) |  |   | Accumulated othercomprehensiveincome |   |  | Totalstockholdersequity |       |   | Comprehensiveincome |  
|Balance, December 31, 2006                                |  | $           | 209 |   |                          | $ | 176,345 |                      |  | $ | (29,489                              | ) |  | $                        | 96    |   |                     | $ | 147,161 |   |  | $ | 16,019 |  
|                                                          |  |             |     |   |                          |   |         |                      |  |   |                                      |   |  |                          |       |   |                     |   |         |   |  |   |        |  
|Common stock repurchase                                   |  |             | (15 | ) |                          |   | (25,467 | )                    |  |   |                                     |   |  |                          |      |   |                     |   | (25,482 | ) |  |   |       |  
|Gain on currency translation adjustment                   |  |             |    |   |                          |   |        |                      |  |   |                                     |   |  |                          | 1,415 |   |                     |   | 1,415   |   |  |   | 1,415  |  
|Unrealized loss on short-term investments                 |  |             |    |   |                          |   |        |                      |  |   |                                     |   |  |                          | (104  | ) |                     |   | (104    | ) |  |   | (104   | )
|Share-based compensation expense                          |  |             |    |   |                          |   | 3,793   |                      |  |   |                                     |   |  |                          |      |   |                     |   | 3,793   |   |  |   |       |  
|Excess tax benefits from share-based payment arrangements |  |             |    |   |                          |   | 1,284   |                      |  |   |                                     |   |  |                          |      |   |                     |   | 1,284   |   |  |   |       |  
|Option exercises                                          |  |             | 2   |   |                          |   | 1,558   |                      |  |   |                                     |   |  |                          |      |   |                     |   | 1,560   |   |  |   |       |  
|Employee stock purchase plan                              |  |             |     |   |                          |   | 251     |                      |  |   |                                     |   |  |                          |      |   |                     |   | 251     |   |  |   |       |  
|Public stock offering, net                                |  |             | 43  |   |                          |   | 130,355 |                      |  |   |                                     |   |  |                          |      |   |                     |   | 130,398 |   |  |   |       |  
|Common stock issuance for earn out                        |  |             |    |   |                          |   | 650     |                      |  |   |                                     |   |  |                          |      |   |                     |   | 650     |   |  |   |       |  
|Common stock issuance for StraightSource acquisition      |  |             | 1   |   |                          |   | 3,173   |                      |  |   |                                     |   |  |                          |      |   |                     |   | 3,174   |   |  |   |       |  
|Net income                                                |  |             |    |   |                          |   |        |                      |  |   | 23,548                               |   |  |                          |      |   |                     |   | 23,548  |   |  |   | 23,548 |  
|                                                          |  |             |     |   |                          |   |         |                      |  |   |                                      |   |  |                          |       |   |                     |   |         |   |  |   |        |  
|Balance, December 31, 2007                                |  | $           | 240 |   |                          | $ | 291,942 |                      |  | $ | (5,941                               | ) |  | $                        | 1,407 |   |                     | $ | 287,648 |   |  | $ | 24,859 |  
|                                                          |  |             |     |   |                          |   |         |                      |  |   |                                      |   |  |                          |       |   |                     |   |         |   |  |   |        |  
|Common stock repurchase                                   |  |             | (13 | ) |                          |   | (24,594 | )                    |  |   |                                     |   |  |                          |      |   |                     |   | (24,607 | ) |  |   |       |  
|Currency translation adjustment                           |  |             |    |   |                          |   |        |                      |  |   |                                     |   |  |                          | 100   |   |                     |   | 100     |   |  |   | 100    |  
|Unrealized loss on investments                            |  |             |    |   |                          |   |        |                      |  |   |                                     |   |  |                          | (883  | ) |                     |   | (883    | ) |  |   | (883   | )
|Share-based compensation expense                          |  |             |    |   |                          |   | 1,714   |                      |  |   |                                     |   |  |                          |      |   |                     |   | 1,714   |   |  |   |       |  
|Excess tax benefits from share-based payment arrangements |  |             |    |   |                          |   | 132     |                      |  |   |                                     |   |  |                          |      |   |                     |   | 132     |   |  |   |       |  
|Option exercises                                          |  |             |    |   |                          |   | 219     |                      |  |   |                                     |   |  |                          |      |   |                     |   | 219     |   |  |   |       |  
|Employee stock purchase plan                              |  |             |    |   |                          |   | 90      |                      |  |   |                                     |   |  |                          |      |   |                     |   | 90      |   |  |   |       |  
|Common stock issuance for earn out                        |  |             | 1   |   |                          |   | 1,049   |                      |  |   |                                     |   |  |                          |      |   |                     |   | 1,050   |   |  |   |       |  
|Net income                                                |  |             |    |   |                          |   |        |                      |  |   | 4,774                                |   |  |                          |      |   |                     |   | 4,774   |   |  |   | 4,774  |  
|                                                          |  |             |     |   |                          |   |         |                      |  |   |                                      |   |  |                          |       |   |                     |   |         |   |  |   |        |  
|Balance, March 31, 2008 (unaudited)                       |  | $           | 228 |   |                          | $ | 270,552 |                      |  | $ | (1,167                               | ) |  | $                        | 624   |   |                     | $ | 270,237 |   |  | $ | 3,991  |  
|                                                          |  |             |     |   |                          |   |         |                      |  |   |                                      |   |  |                          |       |   |                     |   |         |   |  |   |        |  

See notes to consolidated financial statements.



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Kenexa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                 |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                 |  | Three months endedMarch 31, |        
|                                                                                 |  | 2008                        |         |   | 2007 |  
|Cash flows from operating activities                                             |  |                             |         |   |      |   |         |  
|Net income                                                                       |  | $                           | 4,774   |   |      | $ | 4,695   |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                    |  |                             | 2,151   |   |      |   | 1,430   |  
|Share-based compensation expense                                                 |  |                             | 1,714   |   |      |   | 715     |  
|Excess tax benefits from share-based payment arrangements                        |  |                             | (132    | ) |      |   | (341    | )
|Amortization of deferred financing costs                                         |  |                             | 75      |   |      |   | 510     |  
|Bed debt expense (recovery)                                                      |  |                             | 73      |   |      |   | (2      | )
|Deferred income taxes                                                            |  |                             | 1,029   |   |      |   | (1,979  | )
|Changes in assets and liabilities                                                |  |                             |         |   |      |   |         |  
|Accounts and unbilled receivables                                                |  |                             | (3,255  | ) |      |   | 1,399   |  
|Prepaid expenses and other current assets                                        |  |                             | (1,760  | ) |      |   | 971     |  
|Income taxes receivable                                                          |  |                             | 1,091   |   |      |   |        |  
|Other assets                                                                     |  |                             | (140    | ) |      |   | (83     | )
|Accounts Payable                                                                 |  |                             | (528    | ) |      |   | 1,231   |  
|Accrued compensation and other accrued liabilities                               |  |                             | (3,888  | ) |      |   | (2,163  | )
|Commissions payable                                                              |  |                             | (56     | ) |      |   | (480    | )
|Deferred revenue                                                                 |  |                             | 2,403   |   |      |   | 378     |  
|Other liabilities                                                                |  |                             | 8       |   |      |   | (114    | )
|                                                                                 |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                        |  |                             | 3,559   |   |      |   | 6,167   |  
|                                                                                 |  |                             |         |   |      |   |         |  
|Cash flows from investing activities                                             |  |                             |         |   |      |   |         |  
|Purchases of property and equipment                                              |  |                             | (5,619  | ) |      |   | (2,693  | )
|Purchase of available-for-sale securities                                        |  |                             | (16,318 | ) |      |   | (78,573 | )
|Sale of available-for-sale securities                                            |  |                             | 45,105  |   |      |   |        |  
|Acquisitions, net of cash acquired                                               |  |                             | (1,248  | ) |      |   | (1,046  | )
|                                                                                 |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                              |  |                             | 21,920  |   |      |   | (82,312 | )
|                                                                                 |  |                             |         |   |      |   |         |  
|Cash flows from financing activities                                             |  |                             |         |   |      |   |         |  
|Repayments under line of credit                                                  |  |                             |        |   |      |   | (65,000 | )
|Repayments of notes payable                                                      |  |                             | (17     | ) |      |   | (32     | )
|Share issuance from Employee Stock Purchase Plan                                 |  |                             | 90      |   |      |   | 35      |  
|Repurchase of common stock                                                       |  |                             | (24,607 | ) |      |   |        |  
|Excess tax benefits from share-based payment arrangements                        |  |                             | 132     |   |      |   | 341     |  
|Net proceeds from public stock offering                                          |  |                             |        |   |      |   | 131,100 |  
|Deferred financing costs                                                         |  |                             |        |   |      |   | (81     | )
|Net proceeds from option exercises                                               |  |                             | 219     |   |      |   | 397     |  
|Repayment of capital lease obligations                                           |  |                             | (42     | ) |      |   | (59     | )
|                                                                                 |  |                             |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                              |  |                             | (24,225 | ) |      |   | 66,701  |  
|                                                                                 |  |                             |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                     |  |                             | 92      |   |      |   | 53      |  
|Net increase (decrease) in cash and cash equivalents                             |  |                             | 1,346   |   |      |   | (9,391  | )
|Cash and cash equivalents at beginning of period                                 |  |                             | 38,032  |   |      |   | 42,502  |  
|                                                                                 |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                       |  | $                           | 39,378  |   |      | $ | 33,111  |  
|                                                                                 |  |                             |         |   |      |   |         |  
|Supplemental disclosures of cash flow information                                |  |                             |         |   |      |   |         |  
|Cash paid during the period for:                                                 |  |                             |         |   |      |   |         |  
|Interest expense                                                                 |  | $                           | 39      |   |      | $ | 622     |  
|Income taxes                                                                     |  | $                           | 394     |   |      | $ | 1,009   |  
|Income tax receivable applied against estimated tax payments                     |  | $                           | 1,091   |   |      | $ |        |  
|Non-cash investing and financing activities                                      |  |                             |         |   |      |   |         |  
|Common stock issuance for earn out                                               |  | $                           | 1,050   |   |      | $ | 650     |  

See notes to consolidated financial statements.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial StatementsUnaudited

(All amounts in thousands, except share and per share data, unless noted otherwise)

1. Organization

Kenexa Corporation and its subsidiaries (collectively, the Company)
commenced operations in 1987 as a provider of recruiting services to a wide variety of industries. In 1993, the Company offered its first automated talent management system. Between 1994 and March 31, 2008, the Company acquired 27 businesses
that enable it to offer comprehensive human capital management, or HCM, services integrated with web-based technology.

The Company began
its operations in 1987 under its predecessor companies, Insurance Services, Inc., or ISI, and International Holding Company, Inc., or IHC. In December 1999, the Company reorganized its corporate structure by merging ISI and IHC with
and into Raymond Karsan Associates, Inc., or RKA, a Pennsylvania corporation and a wholly owned subsidiary of Raymond Karsan Holdings, Inc., or RKH, a Pennsylvania corporation. Each of RKA and RKH were newly created to consolidate the
businesses of ISI and IHC. In April 2000, the Company changed its name to TalentPoint, Inc. and changed the name of RKA to TalentPoint Technologies, Inc. In November 2000, the Company changed its name to Kenexa Corporation and
changed the name of TalentPoint Technologies, Inc. to Kenexa Technology, Inc., or Kenexa Technology. Currently, Kenexa transacts business primarily through Kenexa Technology.

The Company provides software, services and proprietary content that enable organizations to more effectively recruit and retain employees. Its solutions
are built around a suite of easily configurable software applications that automate talent acquisition and employee performance management best practices. In addition, the Company offers the software applications that form the core of its solutions
on an on-demand basis, which materially reduces the costs and risks associated with deploying traditional enterprise applications, and is complemented by software applications with tailored combinations of outsourcing services, consulting services
and proprietary content based on the Companys 21 years of experience assisting clients in addressing their human resource requirements.

2.
Summary of Significant Accounting Policies

The accompanying consolidated financial statements as of and for the three months ended
March 31, 2008 and 2007 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and the results of
operations and cash flows for the three months ended March 31, 2008 and 2007 have been made. The results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the year ended
December 31, 2008 or for any other interim period. Certain information and footnote disclosures normally included in the Companys annual consolidated financial statements have been condensed or omitted and, accordingly, the accompanying
financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission for the year
ended December 31, 2007. Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current presentation.

Principles of Consolidation

The consolidated financial statements of the Company include the
accounts of Kenexa and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash
Equivalents

Cash and cash equivalents consist of highly liquid investments with remaining maturities of three months or less at the
time of purchase. Cash which is restricted for lease deposits is included in other assets.

Cash and cash equivalents in foreign
denominated currencies which are held in foreign banks at March 31, 2008 and for the year ended December 31, 2007 totaled $6,259 and $11,072, respectively, and represented 15.9% and 29.1%, respectively, of our total cash and cash
equivalents balance at the end of each period.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)

2. Summary of Significant Accounting Policies (Continued)



Short-Term Investments

Short-term investments at March 31, 2008 include municipal bonds with maturities ranging from less than a month to 20 months, may
readily be converted to cash within 7 days, and are rated A to AAA by various rating agencies. Short-term investments are recorded at fair value based on current market rates and are classified as available-for-sale. Changes in the fair
value are included in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements.

Prepaid Expenses and
Other Assets

Prepaid expenses and other current assets consist primarily of prepaid software maintenance agreements, deferred
implementation costs, insurance and other current assets. Deferred implementation costs represent internal payroll and other costs incurred in connection with the configuration of the sites associated with our internet hosting arrangements. These
costs are deferred over the implementation period which precedes the hosting period, typically three to four months, and are expensed ratably when the hosting period commences, typically one to three years. These amounts aggregated $1,680 and $1,512
at March 31, 2008 and December 31, 2007, respectively. The current portion of these deferred costs of $390 and $222 at March 31, 2008 and December 31, 2007, respectively, is included in other current assets and the non-current
portion of $1,290 and $1,290 at March 31, 2008 and December 31, 2007, respectively, is included in other assets in the accompanying consolidated balance sheets.

Other Long-Term Assets

Other long-term assets primarily include cash held in escrow balances in connection with our
acquisitions. These amounts will remain in other assets until the escrow term lapses after which, if there are no claims to the escrow balance, the amounts will be released from escrow as required under our acquisition agreements. The amounts are
then accounted for as additional purchase consideration of the respective acquisition.

Outstanding amounts for the period March 31, 2008 and
December 31, 2007:



|                                     |  |               |       |                  |   |      
|------------------------------------ |  | ------------- | ----- | ---------------- | - | -----
|                                     |  | March 31,2008 |       | December 31,2007
|Acquisition related escrow balances: |  |               |       |                  |   |      
|Knowledge workers                    |  | $             | 100   |                  | $ | 100  
|Gantz Wiley                          |  |               | 600   |                  |   | 600  
|Psychometrics Services Ltd.          |  |               | 758   |                  |   | 758  
|StraightSource                       |  |               | 1,200 |                  |   | 1,200
|HRC Human Resources Consulting GmbH  |  |               | 410   |                  |   | 410  
|                                     |  |               |       |                  |   |      
|Total escrow balances                |  |               | 3,068 |                  |   | 3,068
|Other long-term assets               |  |               | 2,952 |                  |   | 2,811
|                                     |  |               |       |                  |   |      
|Total other long-term assets         |  | $             | 6,020 |                  | $ | 5,879
|                                     |  |               |       |                  |   |      



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)



Software Developed for Internal Use

In accordance with EITF 00-3, Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware, the Company applies AICPA Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, will be capitalized until the software is
substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will
result in additional functionality. Maintenance and training cost are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Management evaluates the useful lives of
these assets on an annual basis and tests for impairments whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal software in any of the periods covered in this
report.

The Company capitalized internal-use software costs of $2,472 for the three months ended March 31, 2008. Amortization of
capitalized internal-use software costs for the three months ended March 31, 2008 and 2007 were $265 and $319, respectively.

Revenue Recognition

The Company derives its revenue from two sources: (1) subscription revenue for solutions, which is comprised of subscription fees
from clients accessing our on-demand software, consulting services, outsourcing services and proprietary content, and from clients purchasing additional support beyond the standard support that is included in the basic subscription fee; and
(2) other fees for discrete professional services. Because the Company provides its solution as a service, the Company follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements, as amended by Staff Accounting Bulletin No. 104, Revenue Recognition. On August 1, 2003, the Company adopted Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables.The Company recognizes revenue when all of the following conditions are met:



| |  | There is persuasive evidence of an arrangement;
|- |  | -----------------------------------------------



| |  | The service has been provided to the client;
|- |  | --------------------------------------------



| |  | The collection of the fees is probable; and
|- |  | -------------------------------------------



| |  | The amount of fees to be paid by the client is fixed or determinable.
|- |  | ---------------------------------------------------------------------

Subscription fees and support revenues are recognized ratably on a monthly basis over the hosting period. Amounts that have been invoiced are recorded in
accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

Discrete
professional services and other revenues, when sold with subscription and support offerings, are accounted for separately since these services have value to the customer on a stand-alone basis and there is objective and reliable evidence of fair
value of the delivered elements. The Companys arrangements do not contain general rights of return. Additionally, when professional services are sold with other elements, the consideration from the revenue arrangement is allocated among the
separate elements based upon the relative fair value. Professional services and other revenues are recorded as follows: Consulting revenues are recognized upon completion of the contracts that are of short duration (generally less than 60 days)
and as the services are rendered for contracts of longer duration.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)

2. Summary of Significant Accounting Policies (Continued)



In determining whether revenues from professional services
can be accounted for separately from subscription revenue, the Company considers the following factors for each agreement: availability from other vendors, whether objective and reliable evidence of fair value exists of the undelivered elements, the
nature and the timing of when the agreement was signed in comparison to the subscription agreement start date and the contractual dependence of the subscription service on the clients satisfaction with the other services. If the professional
service does not qualify for separate accounting, the Company recognizes the revenue ratably over the remaining term of the subscription contract. In these situations the Company defers the direct and incremental costs of the professional service
over the same period as the revenue is recognized.

Deferred revenue represents payments received or accounts receivable from the
Companys clients for amounts billed in advance of subscription services being provided.

The Company records
Out-of-Pocket Expenses Incurred (EITF 01-14), which requires that reimbursements received for out-of-pocket expenses be classified as other revenue and not as cost reductions. Before the effective date of EITF 01-14,
out-of-pocket reimbursements from clients were netted with the applicable costs. These items primarily include travel, meals and certain telecommunication costs. For the three months ended March 31, 2008 and 2007, reimbursed expenses totaled
$603 and $422, respectively.

Self-Insurance

The Company is self-insured for the majority of its health insurance costs, including claims filed and claims incurred but not reported subject to certain stop-loss provisions. The Company estimated the liability based upon
managements judgment and historical experience. At March 31, 2008 and December 31, 2007, self-insurance accruals totaled $602 and $355, respectively. Management continuously reviews the adequacy of the Companys stop-loss
insurance coverage. Material differences may result in the amount and timing of insurance expense if actual experience differs significantly from managements estimates.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of accounts receivable. Credit risk arising from receivables is mitigated due to the large number of clients comprising the Companys client base and their dispersion across various industries. The
clients are concentrated primarily in the Companys U.S. market area. At March 31, 2008, there were no clients that represented more than 10% of the net accounts receivable balance. For the three months ended March 31, 2008 there were
no clients that individually exceeded 10% of the Companys revenues.

Cash balances are maintained at several banks. Accounts located
in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100. Certain operating cash accounts may exceed the FDIC limits.

Earnings Per Share

The Company follows SFAS 128, Earnings Per Share. Under
SFAS 128, companies that are publicly held or have complex capital structures are required to present basic and diluted earnings per share on the face of the statement of operations. Earnings per share are based on the weighted average number
of shares and common stock equivalents outstanding during the period. In the calculation of diluted earnings per share, shares outstanding are adjusted to assume conversion of the Companys non-interest bearing convertible stock and the
exercise of options and warrants if they are dilutive. In the calculation of basic earnings per share, weighted average numbers of shares outstanding are used as the denominator. Options to purchase shares of common stock and restricted stock
included in computation of common stock equivalents for the three months ended March 31, 2008 and 2007 totaled 235,956 and 431,741, respectively.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)

2. Summary of Significant Accounting Policies (Continued)



Basic and diluted earnings per share are computed as
follows:



|                                                                        |  |                             |            |      |   |           
|----------------------------------------------------------------------- |  | --------------------------- | ---------- | ---- | - | ----------
|                                                                        |  | Three months endedMarch 31,
|                                                                        |  | 2008                        |            | 2007
|Numerator:                                                              |  |                             |            |      |   |           
|Net income                                                              |  | $                           | 4,774      |      | $ | 4,695     
|                                                                        |  |                             |            |      |   |           
|Denominator:                                                            |  |                             |            |      |   |           
|Weighted average shares used to compute net income per share  basic    |  |                             | 23,413,071 |      |   | 24,047,807
|Effect of dilutive stock options and warrants                           |  |                             | 235,956    |      |   | 431,741   
|                                                                        |  |                             |            |      |   |           
|Weighted average shares used to compute net income per share  dilutive |  |                             | 23,649,027 |      |   | 24,479,548
|                                                                        |  |                             |            |      |   |           
|Basic net income per share                                              |  | $                           | 0.20       |      | $ | 0.20      
|Diluted net income per share                                            |  | $                           | 0.20       |      | $ | 0.19      

Share-based Compensation Expense

On January 1, 2006, we adopted SFAS No. 123R using the Modified Prospective Approach (MPA). The MPA requires that compensation
expense be recorded for restricted stock and all unvested stock options as of January 1, 2006. Since the adoption, we continue to recognize the cost of previously granted share-based awards on a straight-line basis and recognize the cost for
new share-based awards on a straight-line basis over the requisite service period.

Adoption of new accounting pronouncement

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing an asset or liability and establishes a fair-value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair-value measurements would be
separately disclosed by level within the fair-value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Companys adoption of SFAS No. 157 for financial assets and liabilities on January 1, 2008 did not
have a material impact on the Companys consolidated financial statements.

New Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities  Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value at specified election dates. The
fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value option
has been elected are to be reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has chosen not to elect the fair value option, therefore the
adoption of SFAS 159 did not have an impact on the Companys financial statements.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)

2. Summary of Significant Accounting Policies (Continued)



In December 2007, the Financial Accounting Standards Board
(FASB) issued FAS No. 141(R), Business Combinations (FAS 141(R)) and FAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research
Bulletin No. 51 (FAS 160). Changes for business combination transactions pursuant to FAS 141(R) include, among others, expensing of acquisition-related transaction costs as incurred, the recognition of contingent consideration
arrangements at their acquisition date fair value and capitalization of in-process research and development assets acquired at their acquisition date fair value. Changes in accounting for noncontrolling (minority) interests pursuant to FAS 160
include, among others, the classification of noncontrolling interest as a component of consolidated shareholders equity and the elimination of minority interest accounting in results of operations. FAS 141(R) and FAS 160 are required to
be adopted simultaneously and are effective for fiscal years beginning on or after December 15, 2008. The adoption of FAS 141(R) will impact the accounting for the Companys future acquisitions. We do not believe the adoption of FAS 160
will have a material impact on our consolidated financial position, results of operations or cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of the Companys financial assets and liabilities, including cash and cash equivalents, accounts receivable and accounts payable
at March 31, 2008 and December 31, 2007, approximate fair value of these instruments.

3. Acquisitions

HRC Human Resources Consulting GmbH

On
August 20, 2007, the Company acquired all of the outstanding stock of HRC Human Resources Consulting GmbH (HRC), a leading consultancy for business-orientated employee surveys, based in Munich, Germany, for a purchase price of
approximately $3,757 in cash. The total cost of the acquisition, including legal, accounting, and other professional fees of $372, was approximately $4,129. In connection with the acquisition, $410 of the cash portion of the purchase price was
deposited into an escrow account to cover any claims for indemnification made by the Company against HRC under the acquisition agreement. The escrow agreement will remain in place for approximately five years from the acquisition date, and any funds
remaining in the escrow account at the end of the five year period will be distributed to the former stockholders of HRC. The purchase price has been allocated on a preliminary basis to the assets acquired and liabilities assumed based upon
managements best estimate of fair value with any excess over the net tangible and intangible assets acquired allocated to goodwill. In accordance with Statement of Financial Accounting Standard No. 141, the purchase price and related
purchase price allocation may be updated to reflect changes such as any additional transaction fees or the finalization of the valuation of assets acquired or liabilities assumed.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)



StraightSource

On June 8, 2007, the Company acquired all of the outstanding stock of Strategic Outsourcing Corporation
(StraightSource), a provider of recruitment process outsourcing services, based in Richardson, Texas, for a purchase price including contingent consideration of approximately $12,150 in cash and $4,224 in stock consideration. The total
cost of the acquisition, including legal, accounting, and other professional fees of $40, was approximately $16,414, including acquired intangibles of $7,963, with an estimated useful life between 2.5 and 9 years. The payment of additional
consideration by the Company was based upon the annual revenues of StraightSource through December 31, 2007. Based upon these results, contingent consideration of $4,200 was paid in cash and equity during the first quarter of 2008 to the former
shareholders of StraightSource. In the financial statements at December 31, 2007, $2,100 of the liability had been accrued and an additional $2,100 was determined to be payable in March 2008. In connection with the acquisition, $1,200 of the
cash portion of the purchase price was deposited into an escrow account to cover any claims for indemnification made by the Company against StraightSource under the acquisition agreement. The escrow agreement will remain in place for three years
from the acquisition date and any funds remaining in the escrow account at the end of the three year period will be distributed to the former stockholders of StraightSource. The purchase price has been allocated on a preliminary basis to the assets
acquired and liabilities assumed based upon managements best estimate of fair value with any excess over the net tangible and intangible assets acquired allocated to goodwill. In accordance with Statement of Financial Accounting Standard
No. 141, the purchase price and related purchase price allocation may be updated to reflect changes such as any additional transaction fees or the finalization of the valuation of assets acquired or liabilities assumed.

4. Property, Equipment and Software

A summary of
property, equipment and software and related accumulated depreciation as of March 31, 2008 and December 31, 2007 is as follows:



|                                  |  |               |        |                  |   |       
|--------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                  |  | March 31,2008 |        | December 31,2007
|Equipment                         |  | $             | 12,252 |                  | $ | 11,667
|Software                          |  |               | 12,799 |                  |   | 10,945
|Office Furniture and fixtures     |  |               | 1,986  |                  |   | 1,791 
|Leasehold improvements            |  |               | 1,591  |                  |   | 1,575 
|Land                              |  |               | 752    |                  |   | 752   
|Building construction in progress |  |               |       |                  |   | 4,881 
|Building                          |  |               | 6,311  |                  |   |      
|Software in development           |  |               | 4,312  |                  |   | 2,960 
|                                  |  |               |        |                  |   |       
|                                  |  |               | 40,003 |                  |   | 34,571
|Less accumulated depreciation     |  |               | 16,568 |                  |   | 15,394
|                                  |  |               |        |                  |   |       
|                                  |  | $             | 23,435 |                  | $ | 19,177
|                                  |  |               |        |                  |   |       

Equipment, office furniture and fixtures included capital leases in the amount of $2,590 at
March 31, 2008. Depreciation and amortization expense, including amortization of assets under capital leases, was $1,362 and $1,249 for the periods ended March 31, 2008 and 2007, respectively.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements  Unaudited (Continued)

(All
amounts in thousands, except share and per share data, unless noted otherwise)



5. Other Accrued Liabilities

Other accrued liabilities consist of the following:



|                                     |  |               |       |                  |   |      
|------------------------------------ |  | ------------- | ----- | ---------------- | - | -----
|                                     |  | March 31,2008 |       | December 31,2007
|Accrued professional fees            |  | $             | 205   |                  | $ | 70   
|Straight line rent accrual           |  |               | 981   |                  |   | 932  
|Other taxes payable (non-income tax) |  |               | 798   |                  |   | 973  
|Income taxes payable                 |  |               | 1,688 |                  |   | 818  
|Other liabilities                    |  |               | 1,198 |                  |   | 1,405
|Contingent purchase price            |  |               |      |                  |   | 2,100
|                                     |  |               |       |                  |   |      
|Total other accrued liabilities      |  | $             | 4,870 |                  | $ | 6,298
|                                     |  |               |       |                  |   |      

6. Line of Credit

On November 13, 2006, the Company entered into a secured credit agreement with PNC Bank, N.A. (the Credit Agreement), as administrative agent, in connection with an acquisition. This Credit Agreement
replaced the prior $25,000 revolving credit agreement with PNC Bank and increased the maximum amount available under the credit facility from $25,000 to $75,000, including a $25,000 revolving credit facility, a $50,000 term loan and a sublimit of up
to $2,000 for letters of credit. Borrowings under the new credit facility are secured by substantially all of the Companys assets and the assets of its subsidiaries. As of December 31, 2006, the Company had borrowings of
$65,000 outstanding under the Credit Agreement with a weighted average interest rate of 7.9% per annum. In January 2007, the Company used a portion of the net proceeds of its public offering to repay all outstanding borrowings, including
the entire balance of the term loan under the Credit Agreement.

On March 26, 2007, the Company entered into a First Amendment to
Credit Agreement (the Amendment) with PNC Bank, N.A. The Amendment increased the maximum amount available under the revolving credit facility portion of the Credit Agreement from $25,000 to $50,000, including a sublimit of up to $2,000
for letters of credit. In January 2007, the Company repaid the balance of its obligations relating to the term loan portion of the Credit Agreement with the net proceeds from the Companys public offering of its common stock. The
Amendment provides that the Credit Agreement will terminate, and all borrowings will become due and payable, on March 26, 2010. The Company and each of the U.S. subsidiaries of Kenexa Technology are guarantors of the obligations of
Technology under the Credit Agreement, as amended by the Amendment. As of March 31, 2008, there were no outstanding borrowings under the Credit Agreement.

The Companys borrowings under the Credit Agreement bear interest at tiered rates based upon the ratio of Net Funded Debt to EBITDA as defined in the Third Amendment. The Company may also elect interest rates on
its borrowings calculated by reference to LIBOR plus a margin based upon the ratio of its Net Funded Debt to EBITDA. Interest on LIBOR borrowings is calculated on an actual/360 day basis and is paid on the last day of each interest period.
LIBOR advances are available for periods of 1, 2, 3 or 6 months. LIBOR pricing is adjusted for any statutory reserves.

Borrowings
under the Revolver are collateralized generally by the Companys assets, including a pledge of the capital stock of its subsidiaries. The Credit Agreement contains various terms and covenants that provide for restrictions on capital
expenditures, payment of dividends, dispositions of assets, investments and acquisitions and require the Company, among other things, to maintain minimum levels of tangible net worth, net income and fixed charge coverage. The Company was compliant
with covenants at March 31, 2008.

The Company has issued an irrevocable stand-by letter of credit for $500 for security on its
sublease for its Waltham, MA office facility. The stand-by letter of credit automatically renews annually on June 30th, with 60 days cancellation notice until its expiration on June 28, 2011.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(All amounts in
thousands, except share and per share data, unless noted otherwise)



7.
Commitments and Contingencies

Litigation

We are involved in claims, that arise in the ordinary course of business. In the opinion of management, we have made adequate provision for potential liabilities, if any, arising from any such matters. However, litigation is inherently
unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in
any such matters, and developments or assertions by or against us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our business, financial condition and operating results.

8. Equity

Rollforward of Shares

The Companys common shares issued and repurchased for the three months ended March 31, 2008 and the year ended December 31, 2007 are as follows:



|                                 |  |               |  
|-------------------------------- |  | ------------- | -
|                                 |  | Common Shares |  
|                                 |  | Class A       |  
|December 31, 2006 ending balance |  | 20,897,777    |  
|Repurchase of shares             |  | (1,448,091    | )
|Shares from public offering      |  | 4,312,500     |  
|Stock option exercises           |  | 136,673       |  
|Employee stock purchase plan     |  | 10,152        |  
|Restricted shares issued         |  | 16,200        |  
|Shares issued for acquisition    |  | 107,235       |  
|                                 |  |               |  
|December 31, 2007 ending balance |  | 24,032,446    |  
|                                 |  |               |  
|Repurchase of shares             |  | (1,316,009    | )
|Stock option exercises           |  | 44,740        |  
|Employee stock purchase plan     |  | 4,677         |  
|Shares issued for earn out       |  | 55,876        |  
|                                 |  |               |  
|March 31, 2008 ending balance    |  | 22,821,730    |  
|                                 |  |               |  

Refer to the accompanying consolidated statements of shareholders equity and this note for
further discussion.

On February 20, 2008, our board of directors authorized a stock repurchase plan providing for the repurchase of
up to 3,000,000 shares of our common stock, of which 764,100 shares were repurchased at an aggregate cost of $14,760 as of March 31, 2008. These shares were restored to original status and accordingly are presented as authorized but not issued.
The timing, price and volume of repurchases were based on market conditions, relevant securities laws and other factors. As of March 31, 2008 the number of shares available for repurchase under the stock repurchase plan was 2,235,900. Through
May 5, 2008, an additional 292,193 shares available for repurchase under the stock repurchase plan were repurchased at an aggregate cost of $5,235.

On November 8, 2007, our board of directors authorized a stock repurchase plan providing for the repurchase of up to 2,000,000 shares of our common stock, of which 1,448,091 shares were repurchased at an
aggregate cost of $25,482 as of December 31, 2007. These shares were restored to original status prior to December 31, 2007 and accordingly are presented as authorized but not issued. The timing, price and volume of repurchases were based
on market conditions, relevant securities laws and other factors. As of December 31, 2007 the number of shares available for repurchase under the stock repurchase plan was 551,909. Through January 24, 2008, the remaining 551,909 shares
available for repurchase under the stock repurchase plan were repurchased at an aggregate cost of $9,848.

On January 18, 2007, the
Company completed a public offering of 3,750,000 shares of its common stock at a price of $31.86 per share. Net proceeds to the Company aggregated approximately $113,298 after payment of all offering fees, underwriters commission and offering
expenses of $6,177. On January 24, 2007, the underwriters exercised their over-allotment option under the terms of the underwriting agreement to purchase 562,500 additional shares of common stock. Net proceeds to the Company following the sale
of the overallotment shares were $17,100.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(All amounts in
thousands, except share and per share data, unless noted otherwise)



9.
Stock Plans

Employee Stock Option Plan

The Companys 2005 Equity Incentive Plan (the 2005 Option Plan), which was adopted by the Companys Board of Directors (the Board) in March 2005 and was approved by the Companys shareholders in June
2005, provides for the granting of stock options to employees and directors at the discretion of the Board or a committee of the Board. The 2005 Option Plan replaced the Companys 2000 Stock Option Plan (the 2000 Option Plan).

As of March 31, 2008, there were options and restricted stock to purchase 1,932,895 shares of common stock outstanding under the 2005
Option Plan. The Company is authorized to issue up to an aggregate of 4,842,910 shares of its common stock pursuant to stock options granted under the 2005 Option Plan. As of March 31, 2008, 2,701,946 shares of common stock not subject to
outstanding options and restricted stock were available for issuance under the 2005 Option Plan. The purpose of stock options is to recognize past services rendered and to provide additional incentive to contribute to the continued success of the
Company. Stock options granted under both the 2005 Option Plan and the 2000 Stock Option Plan expire between the fifth and tenth anniversary of the date of grant and generally vest on the third anniversary of the date of grant. Unexercised stock
options may expire up to 90 days after an employees termination.

SFAS 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model. In 2008 and 2007, the fair value of each grant was estimated using the Black-Scholes valuation model. Expected volatility was based upon a weighted average of peer
companies and the Companys stock volatility. The expected life was determined based upon an average of the contractual life and vesting period of the options, in accordance with SAB 107. The estimated forfeiture rate was based upon an analysis
of historical data. The risk-free rate was based on U.S. Treasury zero coupon bond yields at the time of grant. The following table provides the assumptions used in determining the fair value of the share-based awards for the period ended
March 31, 2008 and the year ended December 31, 2007, respectively.



|                         |  |               |   |  |                            |  
|------------------------ |  | ------------- | - |  | -------------------------- | -
|                         |  | March 31,2008 |   |  | Year endedDecember 31,2007 |  
|Expected volatility      |  | 56.23         | % |  | 47.26 54.95               | %
|Expected dividends       |  | 0             |   |  | 0                          |  
|Expected term (in years) |  | 3.75          |   |  | 4  5                      |  
|Risk-free rate           |  | 2.56          | % |  | 2.5  4.6                  | %

A summary of the status of the Companys stock options as of March 31, 2008 and December 31, 2007
and changes during the period then ended is as follows:



|                             |  |                                        |   |                     |           |   |  |                        |       |        |         |                        |   |      
|---------------------------- |  | -------------------------------------- | - | ------------------- | --------- | - |  | ---------------------- | ----- | ------ | ------- | ---------------------- | - | -----
|                             |  | Options & Restricted Stock Outstanding |   | Options Exercisable
|                             |  | Sharesavailable forGrant               |   |                     | Shares    |   |  | Wtd. Avg.ExercisePrice |       | Shares |         | Wtd. Avg.ExercisePrice
|Balance at December 31, 2006 |  | 3,138,046                              |   |                     | 1,302,008 |   |  | $                      | 14.63 |        | 321,208 |                        | $ | 14.26
|Granted  options            |  | (539,400                               | ) |                     | 539,400   |   |  |                        | 35.40 |        |        |                        |   |     
|Granted  restricted stock   |  | (16,200                                | ) |                     | 16,200    |   |  |                        | 0.00  |        |        |                        |   |     
|Exercised                    |  |                                       |   |                     | (136,673  | ) |  |                        | 11.42 |        |        |                        |   |     
|Forfeited or expired         |  | 119,900                                |   |                     | (119,900  | ) |  |                        | 22.24 |        |        |                        |   |     
|                             |  |                                        |   |                     |           |   |  |                        |       |        |         |                        |   |      
|Balance at December 31, 2007 |  | 2,702,346                              |   |                     | 1,601,035 |   |  | $                      | 21.18 |        | 241,335 |                        |   | 14.96
|                             |  |                                        |   |                     |           |   |  |                        |       |        |         |                        |   |      
|Granted  options            |  | (399,000                               | ) |                     | 399,000   |   |  |                        | 18.66 |        |        |                        |   |     
|Exercised                    |  |                                       |   |                     | (44,740   | ) |  |                        | 4.90  |        |        |                        |   |     
|Forfeited or expired         |  | 22,400                                 |   |                     | (22,400   | ) |  |                        | 29.09 |        |        |                        |   |     
|                             |  |                                        |   |                     |           |   |  |                        |       |        |         |                        |   |      
|Balance at March 31, 2008    |  | 2,325,746                              |   |                     | 1,932,895 |   |  |                        | 20.94 |        | 311,395 |                        |   | 12.60
|                             |  |                                        |   |                     |           |   |  |                        |       |        |         |                        |   |      

The total intrinsic values of options outstanding, exercisable and exercised for the period ended
March 31, 2008 were $5,684, $2,360 and $619, respectively. The weighted average fair values for options granted during the three months ended March 31, 2008 and the year ended December 31, 2007 were $8.25 and $14.91, respectively. The
weighted-average remaining contractual terms (in years) of options outstanding and exercisable as of March 31, 2008 were 5.07 and 5.48, respectively.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(All amounts in
thousands, except share and per share data, unless noted otherwise)

9. Stock Plans (continued)



A summary of the status of the Companys nonvested share options and
restricted stock as of March 31, 2008 and December 31, 2007 is presented below:



|                               |  |           |   |  |                               |      
|------------------------------ |  | --------- | - |  | ----------------------------- | -----
|Nonvested Shares               |  | Shares    |   |  | Wtd. Avg.Grant DateFair Value
|Nonvested at December 31, 2006 |  | 980,800   |   |  | $                             | 8.65 
|Grantedoptions                |  | 539,400   |   |  |                               | 14.91
|Grantedrestricted stock       |  | 16,200    |   |  |                               | 31.46
|Vested                         |  | (56,800   | ) |  |                               | 13.26
|Forfeited or expired           |  | (119,900  | ) |  |                               | 9.78 
|                               |  |           |   |  |                               |      
|Nonvested at December 31, 2007 |  | 1,359,700 |   |  | $                             | 10.73
|                               |  |           |   |  |                               |      
|Grantedoptions                |  | 399,000   |   |  |                               | 8.25 
|Vested                         |  | (114,800  | ) |  |                               | 11.96
|Forfeited or expired           |  | (22,400   | ) |  |                               | 12.10
|                               |  |           |   |  |                               |      
|Nonvested at March 31, 2008    |  | 1,621,500 |   |  | $                             | 10.01
|                               |  |           |   |  |                               |      

Between January 1, 2008 and March 31, 2008, the Company granted options to certain
employees to purchase an aggregate of 399,000 shares of the Companys common stock at a weighted exercise price of $18.66 per share. The Company granted the options at prevailing market prices at $18.66 per share.

Between January 1, 2007 and December 31, 2007, the Company granted options to certain employees to purchase an aggregate of 539,400 shares of
the Companys common stock at a weighted exercise price of $35.40 per share. The Company granted the options at prevailing market prices ranging from $29.94 to $36.87 per share.

On August 14, 2007, the Company granted to each non-employee member of the Board of Directors 2,700 shares of restricted stock, or an aggregate of
16,200 shares of restricted stock, which will remain unvested until the date immediately preceding the Companys 2008 annual meeting of shareholders, provided that such non-employee director has maintained continuous service on the Board of
Directors through such date. The grant date fair value of the restricted stock was $31.46.

SFAS No. 123R also requires us to change
the classification of any tax benefits realized upon exercise of stock options in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are presented as a financing cash inflow rather than as
a reduction of income taxes paid in our consolidated statement of cash flows.

In accordance with Staff Accounting Bulletin No. 107,
we classified share-based compensation within cost of goods sold, selling, general and administrative expenses and research and development corresponding to the same line as the cash compensation paid to respective employees, officers and
non-employee directors.

The following table shows total share-based compensation expense included in the Consolidated Statement of
Operations:



|                                      |  |                                     |       |      |   |    
|------------------------------------- |  | ----------------------------------- | ----- | ---- | - | ---
|                                      |  | For the three months endedMarch 31,
|                                      |  | 2008                                |       | 2007
|Cost of revenue                       |  | $                                   | 84    |      | $ | 177
|Sales and marketing                   |  |                                     | 284   |      |   | 179
|General and administrative            |  |                                     | 1,247 |      |   | 321
|Research and development              |  |                                     | 99    |      |   | 38 
|                                      |  |                                     |       |      |   |    
|Pre-tax share-based compensation      |  | $                                   | 1,714 |      | $ | 715
|Income tax benefit                    |  |                                     | 488   |      |   | 278
|                                      |  |                                     |       |      |   |    
|Share-based compensation expense, net |  | $                                   | 1,226 |      | $ | 437
|                                      |  |                                     |       |      |   |    



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(All amounts in
thousands, except share and per share data, unless noted otherwise)

9. Stock Plans (continued)



Employee Stock Purchase Plan

The Employee Stock Purchase Plan approved in May 2006 (the Plan), enables substantially all U.S. and foreign employees to purchase shares of
our common stock at a 5% discounted offering price off the closing market price of our common stock on the NASDAQ National Market, LLC on the offering date. We have granted rights to purchase up to 500,000 common shares to our employees under the
Plan. The Plan is not considered a compensatory plan in accordance with SFAS 123(R) and requires no compensation expense to be recognized. For the periods ended March 31, 2008 and December 31, 2007, 4,677 and 10,152 shares of our common
stock, respectively, were purchased under the Plan.

10. Related Party Transactions

One of the Companys directors, Barry M. Abelson, is a partner in the law firm of Pepper Hamilton LLP. This firm has represented the Company since
1997. For the three months ended March 31, 2008 and 2007, the Company paid Pepper Hamilton LLP, $37 and $276, respectively, for general legal matters. The amounts payable to Pepper Hamilton as of March 31, 2008 and December 31, 2007
were $30 and $33, respectively.

11. Income Taxes

The Companys tax provision for interim periods is determined using an estimate of its annual effective tax rate. The 2008 effective tax rate is estimated to be lower than the 35% statutory rate primarily due to
anticipated earnings in subsidiaries outside the U.S. in jurisdictions where the effective rate is lower than in the U.S. and tax exempt interest income.

Adoption of new accounting pronouncement

On January 1, 2007, we adopted the Financial Accounting Standard Boards
Interpretation No. 48, Accounting for Income Tax Uncertainties (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions recognized in financial statements and requires the impact of a tax position to
be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. We do not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next
twelve months. Our policy is to recognize interest and penalties on unrecognized tax benefits in the provision for income taxes in the consolidated statements of operations. Tax years beginning in 2004 are subject to examination by taxing
authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(All amounts in
thousands, except share and per share data, unless noted otherwise)



12.
Geographic Information

The following table summarizes the distribution of revenue by geographic region as determined by billing address
for the three months ended March 31, 2008 and 2007.



|                         |  |                                           |        |                                        |                                           |   |         |   |                                        |  |       |  
|------------------------ |  | ----------------------------------------- | ------ | -------------------------------------- | ----------------------------------------- | - | ------- | - | -------------------------------------- |  | ----- | -
|                         |  | For the three months ended March 31, 2008 |        |                                        | For the three months ended March 31, 2007 |  
|Country                  |  | Revenue                                   |        | Revenue as apercentage oftotal revenue |                                           |   | Revenue |   | Revenue as apercentage oftotal revenue | 
|United States            |  | $                                         | 37,770 |                                        | 78.4                                      | % |         | $ | 36,817                                 |  | 87.2  | %
|United Kingdom           |  |                                           | 4,087  |                                        | 8.5                                       | % |         |   | 2,986                                  |  | 7.1   | %
|Germany                  |  |                                           | 1,027  |                                        | 2.1                                       | % |         |   | 127                                    |  | 0.3   | %
|The Netherlands          |  |                                           | 466    |                                        | 1.0                                       | % |         |   | 542                                    |  | 1.3   | %
|Other European Countries |  |                                           | 2,112  |                                        | 4.4                                       | % |         |   | 1,148                                  |  | 2.7   | %
|Canada                   |  |                                           | 986    |                                        | 2.0                                       | % |         |   | 240                                    |  | 0.6   | %
|Other                    |  |                                           | 1,759  |                                        | 3.6                                       | % |         |   | 357                                    |  | 0.8   | %
|                         |  |                                           |        |                                        |                                           |   |         |   |                                        |  |       |  
|Total                    |  | $                                         | 48,207 |                                        | 100.0                                     | % |         | $ | 42,217                                 |  | 100.0 | %
|                         |  |                                           |        |                                        |                                           |   |         |   |                                        |  |       |  

The following table summarizes the distribution of assets by geographic region as of
March 31, 2008 and December 31, 2007.



|               |  |                |         |                                      |                   |   |        |   |                                      |  |       |  
|-------------- |  | -------------- | ------- | ------------------------------------ | ----------------- | - | ------ | - | ------------------------------------ |  | ----- | -
|               |  | March 31, 2008 |         |                                      | December 31, 2007 |  
|Country        |  | Assets         |         | Assets as apercentage oftotal assets |                   |   | Assets |   | Assets as apercentage oftotal assets | 
|United States  |  | $              | 288,112 |                                      | 87.5              | % |        | $ | 306,276                              |  | 88.0  | %
|United Kingdom |  |                | 18,295  |                                      | 5.6               | % |        |   | 16,889                               |  | 4.9   | %
|India          |  |                | 12,306  |                                      | 3.7               | % |        |   | 14,436                               |  | 4.1   | %
|Germany        |  |                | 7,242   |                                      | 2.2               | % |        |   | 6,888                                |  | 2.0   | %
|Canada         |  |                | 2,332   |                                      | 0.7               | % |        |   | 2,428                                |  | 0.7   | %
|Other          |  |                | 974     |                                      | 0.3               | % |        |   | 972                                  |  | 0.3   | %
|               |  |                |         |                                      |                   |   |        |   |                                      |  |       |  
|Total          |  | $              | 329,261 |                                      | 100.0             | % |        | $ | 347,889                              |  | 100.0 | %
|               |  |                |         |                                      |                   |   |        |   |                                      |  |       |  



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##### Table of Contents

Kenexa Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(All amounts in
thousands, except share and per share data, unless noted otherwise)



13.
Short-term and long-term investments

On March 31, 2008 the Company had the following investments totaling approximately $28,752.



|                        |  |                     |  |        |       
|----------------------- |  | ------------------- |  | ------ | ------
|Type of investment:     |  | Assetclassification |  | Amount
|Municipal securities    |  | Short-term          |  | $      | 7,489 
|Auction rate securities |  | Long-term           |  |        | 21,263
|                        |  |                     |  |        |       
|Total investments:      |  |                     |  | $      | 28,752
|                        |  |                     |  |        |       

Beginning in March 2008, the Company experienced failed auctions for 15 auction rate securities
(ARS) issues representing principal and interest of $21,263. However, during the three months ended March 31, 2008, the Company sold 7 ARS issues with principal balances totaling $10,500. The Company determined that a temporary
impairment of its ARS has occurred and therefore recorded a charge of $978, with no tax benefit, to accumulated other comprehensive income as of March 31, 2008. Additionally, due to the current uncertainty surrounding the ability to
liquidate its ARS securities over the next twelve months, the Company has reclassified these investments to long-term assets from short-term assets as of December 31, 2007. These securities will continue to accrue interest at the
contractual rate and will be auctioned every 90 days until sold. Based on the size of this investment, the Companys ability to access cash and other short investments, and expected operating cash flows, the Company does not anticipate the
illiquidity of this investment to affect its operations.

As a result of the changes in the ARS market we have adjusted the fair value of
our ARS investment portfolio using a discounted cash flow model to determine the estimated fair value of our ARS investments as of March 31, 2008. The assumptions used in preparing the discounted cash flow model include level three inputs, as
defined in SFAS No. 157, Fair Value Measurements, such as estimates for interest rates, the amount of cash flows and an expected holding period of the ARS. Based upon our assessment, the fair value of our ARS investments declined approximately $1.0
million for the three months ended March 31, 2008 to $21.3 million, which was deemed temporary and was recognized in accumulated other comprehensive income (loss). In the future we will continue to monitor the ARS market and depending upon market
conditions and our own cash requirements may record additional temporary losses if appropriate.

14. Subsequent Events

On April 2, 2008, the Company acquired all of the outstanding stock of Quorum International Holdings Limited (Quorum), a provider of
recruitment process outsourcing services based in London, England, for a purchase price of approximately $19,753, in cash. In addition, the acquisition agreement contains an earn out provision which provides for the payment of additional
consideration by the Company based upon the gross margins of Quorum. In connection with the acquisition, $5,500 of the purchase price was deposited into an escrow account to cover any claims for indemnification made by the Company against Quorum
under the acquisition agreement. The escrow agreement will remain in place for eighteen months from the acquisition date and any funds remaining in the escrow account at the end of the eighteen month period will be distributed to the former
stockholders of Quorum.



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##### Table of Contents

|Item 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q, including the following Managements Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that
involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained herein that are not historical facts and statements
identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates or words of similar meaning. These statements may contain, among other
things, guidance as to future revenue and earnings, operations, prospects of the business generally, intellectual property and the development of products. These statements are based on our current beliefs or expectations and are inherently subject
to various risks and uncertainties, including those set forth under the caption Risk Factors in our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Actual results may differ materially from
these expectations due to changes in global political, economic, business, competitive, market and regulatory factors, our ability to implement business and acquisition strategies or to complete or integrate acquisitions. We do not undertake any
obligation to update any forward-looking statements contained herein as a result of new information, future events or otherwise. References herein to Kenexa, we, our, and us collectively refer to
Kenexa Corporation, a Pennsylvania corporation, and all of its direct and indirect U.S., U.K., Canada, India, and other foreign subsidiaries.

1.
Overview

We provide software, services and proprietary content that enable organizations to more effectively recruit and retain
employees. Our solutions are built around a suite of easily configurable software applications that automate talent acquisition and employee performance management best practices. We offer the software applications that form the core of our
solutions on an on-demand basis, which materially reduces the costs and risks associated with deploying traditional enterprise applications. We complement our software applications with tailored combinations of outsourcing services, consulting
services and proprietary content based on our 21 years of experience assisting clients in addressing their human resource requirements. Together, our software applications and services form solutions that we believe enable our clients to improve the
effectiveness of their talent acquisition programs, increase employee productivity and retention, measure key HR metrics and make their talent acquisition and employee performance management programs more efficient.

Since 1999, we have focused on providing talent acquisition and employee performance management solutions on a subscription basis and currently generate
a significant portion of our revenue from these subscriptions. For the three months ended March 31, 2008 and 2007, revenue from these subscriptions comprised approximately 81.2% and 82.2%, respectively, of our total revenue. We generate the
remainder of our revenue from discrete professional services that are not provided as part of an integrated solution on a subscription basis. These subscription-based solutions provide us with a recurring revenue stream and we believe represent a
more compelling opportunity in terms of growth and profitability than discrete professional services. As a result, since 1999 discrete professional services have represented a consistently decreasing percentage of our revenue. We expect that trend
to continue.

We sell our solutions to large and medium-sized organizations through our direct sales force. As of December 31, 2007,
we had a client base of approximately 4,000 companies, including approximately 199 companies on the Fortune 500 list published in April 2007. Our client base includes companies that we billed for services during the year ended December 31, 2007
and does not necessarily indicate an ongoing relationship with each such client. Our top 80 clients contributed approximately $26.7 million, or 55.4%, of our total revenue for the three months ended March 31, 2008.



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##### Table of Contents

2. Recent Events

On February 20, 2008, our board of directors authorized a stock repurchase plan providing for the repurchase of up to 3,000,000 shares of our common stock, of which 764,100 shares were repurchased at an aggregate
cost of $14.8 million as of March 31, 2008. These shares were restored to original status and accordingly are presented as authorized but not issued. The timing, price and volume of repurchases were based on market conditions, relevant
securities laws and other factors. As of March 31, 2008 the number of shares available for repurchase under the stock repurchase plan was 2,235,900. Through May 5, 2008, an additional 292,193 shares available for repurchase under the stock
repurchase plan were repurchased at an aggregate cost of $5.2 million.

On November 8, 2007, our board of directors authorized a stock
repurchase plan providing for the repurchase of up to 2,000,000 shares of our common stock, of which 1,448,091 shares were repurchased at an aggregate cost of $25.5 million as of December 31, 2007. As of January 24, 2008, the remaining
551,909 shares available for repurchase under the stock repurchase plan were repurchased at an aggregate cost of $9.8 million. The timing, price and volume of repurchases were based on market conditions, relevant securities laws and other factors.

On August 20, 2007, we acquired HRC Human Resources Consulting GmbH (HRC), a leading consultancy for business-orientated
employee surveys, based in Munich, Germany, for a purchase price of approximately $3.8 million in cash. The total cost of the acquisition, including legal, accounting, and other professional fees of $0.3 million, was approximately $4.1 million. The
acquisition of HRC provides us with a presence in Germany and enhances our expansion in European countries.

On June 8, 2007, we
acquired StraightSource, a provider of recruitment process outsourcing services, based in Dallas, Texas, for a purchase price including contingent consideration of approximately $12.2 in cash and $4.2 in stock consideration. The total cost of the
acquisition was approximately $16.4 million. The payment of additional consideration was based upon the annual revenues of StraightSource through December 31, 2007. Based upon these results, contingent consideration of $4.2 million was paid in cash
and equity during the first quarter of 2008 to the former shareholders of StraightSource. We expect that the acquisition of StraightSource will provide additional efficiency to our exempt and non-exempt recruitment offering and expand our
distribution capabilities in the Southwest market.

On March 26, 2007, we entered into a First Amendment to Credit Agreement with
PNC Bank. The amendment increased the maximum amount available under the revolving credit facility portion of the Credit Agreement from $25 million to $50 million, including a sublimit of up to $2 million for letters of credit. The amendment
provides that the credit agreement will terminate, and all borrowings will become due and payable, on March 26, 2010.

On
January 18, 2007, we completed a public offering of 3,750,000 shares of our common stock at a price to the public of $31.86 per share. We also sold an additional 562,500 shares of our common stock to cover over-allotments of
shares. Our net proceeds from the offering, after payment of all offering expenses and commissions, aggregated approximately $130.4 million. We repaid all of the outstanding borrowings under our credit facility with a portion of the net
proceeds from the offering.



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##### Table of Contents

3. Sources of Revenue

We derive revenue primarily from two sources: (1) subscription revenue for our solutions, which is comprised of subscription fees from clients accessing our on-demand software, consulting services, outsourcing
services and proprietary content, and from clients purchasing additional support that is not included in the basic subscription fee; and (2) fees for discrete professional services.

Our clients primarily purchase renewable subscriptions for our solutions. The typical term is one to three years, with some terms extending up to five
years. The majority of our subscription agreements are not cancelable for convenience although our clients have the right to terminate their contracts for cause if we fail to provide the agreed upon services or otherwise breach the agreement. A
client does not generally have a right to a refund of any advance payments if the contract is cancelled. We expect that we will maintain our renewal rate of approximately 90.0% of the aggregate contract value up for renewal for 2008. The revenue
derived from subscription fees is recognized ratably over the term of the subscription agreement. We generally invoice our clients in advance in monthly or quarterly installments and typical payment terms provide that our clients pay us within 30
days of the invoice date. Amounts that have been invoiced are recorded in accounts receivable prior to the receipt of payment and in deferred revenue to the extent revenue recognition criteria have not been met. As the subscription component of our
revenue has grown and clients willingness to pay us in advance for their subscriptions has increased, the amount of deferred revenue on our balance sheet has grown. As of March 31, 2008, deferred revenue increased to $37.5 million from
$35.1 million as of December 31, 2007. We generally price our solutions based on the number of software applications and services included and the number of client employees. Accordingly, subscription fees are generally greater for larger
organizations and for those that subscribe for a broader array of software applications and services.

A small portion of our clients
purchase discrete professional services. These services primarily consist of consulting and training services. In addition, we recognize a small amount of revenue from sales of perpetual software licenses. The revenue from these services and
licenses is recognized differently depending on the type of service or license provided as described in greater detail below under Critical Accounting Policies and Estimates.

We generate a majority of our revenue within the United States. Approximately 78.4% of our total revenue was derived from sales in the United States for
the three months ended March 31, 2008. Approximately 13.6% of our total revenue was generated from clients in Canada, Germany, the Netherlands and the United Kingdom for the three months ended March 31, 2008. Revenue from other clients
amounted to approximately 8.0% of our total revenue for the three months ended March 31, 2008.



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##### Table of Contents

4. Key Performance Indicators

The following tables summarize the key performance indicators that we consider to be material in managing our business, in thousands:



|                                                      |  |                               |         |   |                                     |   |        |             |  |   |        |  
|----------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------------- | - | ------ | ----------- |  | - | ------ | -
|                                                      |  | For the yearendedDecember 31, |         |   | For the three months endedMarch 31, |  
|                                                      |  | 2007                          |         |   | 2008                                |   |        | 2007        | 
|                                                      |  |                               |         |   | (unaudited)                         |   |        | (unaudited) | 
|Total Revenue                                         |  | $                             | 181,926 |   |                                     | $ | 48,207 |             |  | $ | 42,217 |  
|Subscription revenue as a percentage of total revenue |  |                               | 81.7    | % |                                     |   | 81.2   | %           |  |   | 82.2   | %
|Income from operations                                |  | $                             | 31,029  |   |                                     | $ | 6,527  |             |  | $ | 7,130  |  
|Net cash provided by operating activities             |  | $                             | 38,563  |   |                                     | $ | 3,559  |             |  | $ | 6,167  |  
|                                                      |  |                              
|                                                      |  |                               |         |   | As of March 31,                     |  
|                                                      |  |                               |         |   | 2008                                |   |        | 2007        | 
|                                                      |  |                               |         |   | (unaudited)                         |   |        | (unaudited) | 
|Deferred revenue                                      |  |                               |         |   |                                     | $ | 37,481 |             |  | $ | 31,655 |  

The following is a discussion of significant terms used in the tables above.

Subscription revenue as a percentage of total revenue.Subscription revenue as a percentage of total revenue can be derived from our consolidated
statements of operations. This performance indicator illustrates the evolution of our business towards subscription-based solutions, which provide us with a recurring revenue stream and which we believe to be a more compelling revenue growth and
profitability opportunity. We expect that the percentage of subscription revenue will be in the range of 78% to 83% of our total revenues through at least 2008. Subscription revenue as a percentage of total revenue may be impacted by the nature of
the revenue earned by entities that we acquire.

Net cash provided by operating activities.Net cash provided by operating activities
is taken from our consolidated statement of cash flows and represents the amount of cash generated by our operations that is available for investing and financing activities. Generally, our net cash provided by operating activities has exceeded our
operating income primarily due to the positive impact of deferred revenue. We expect this trend to continue because of the advance payment structure of our subscription agreements and because as our sales increase, we expect incremental costs to
decline.

Deferred revenue.We generate revenue primarily from multi-year subscriptions for our on-demand talent acquisition and
employee performance management solutions. We recognize revenue from these subscription agreements ratably over the hosting period, which is typically one to three years. We generally invoice our clients in quarterly or monthly installments in
advance. Deferred revenue, which is included in our consolidated balance sheets, is the amount of invoiced subscriptions in excess of the amount recognized as revenue. Deferred revenue represents, in part, the amount that we will record as revenue
in our consolidated statements of operations in future periods. As the subscription component of our revenue has grown and customer willingness to pay us in advance for their subscriptions has increased, the amount of deferred revenue on our balance
sheet has grown. We expect this trend to continue.

The following table reconciles beginning and ending deferred revenue for each of the periods shown, in
thousands:



|                                                |  |                               |          |   |                                    |   |         |             |  |   |         |  
|----------------------------------------------- |  | ----------------------------- | -------- | - | ---------------------------------- | - | ------- | ----------- |  | - | ------- | -
|                                                |  | For theyear endedDecember 31, |          |   | For thethree months endedMarch 31, |  
|                                                |  | 2007                          |          |   | 2008                               |   |         | 2007        | 
|                                                |  |                               |          |   | (unaudited)                        |   |         | (unaudited) | 
|Deferred revenue at the beginning of the period |  | $                             | 31,251   |   |                                    | $ | 35,076  |             |  | $ | 31,251  |  
|Total invoiced subscriptions during period      |  |                               | 152,367  |   |                                    |   | 41,561  |             |  |   | 35,091  |  
|Deferred revenue from acquisitions              |  |                               | 120      |   |                                    |   |        |             |  |   |        |  
|Subscription revenue recognized during period   |  |                               | (148,662 | ) |                                    | $ | (39,156 | )           |  | $ | (34,687 | )
|                                                |  |                               |          |   |                                    |   |         |             |  |   |         |  
|Deferred revenue at end of period               |  | $                             | 35,076   |   |                                    |   | 37,481  |             |  |   | 31,655  |  
|                                                |  |                               |          |   |                                    |   |         |             |  |   |         |  



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##### Table of Contents

5. Results of Operations

Three months ended March 31, 2008 compared to three months ended March 31, 2007

The following table sets forth for the periods
indicated, the amount and percentage of total revenues represented by certain items reflected in our unaudited consolidated statements of operations:

Kenexa Corporation Consolidated Statements of Operations

(In thousands)

(Unaudited)



|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|------------------------------------------ |  | ---------------------------------- | ------ | ------------------ | ----- | - | ------ | - | ------------------ |  | ----- | -
|                                           |  | For theThree Months EndedMarch 31, |       
|                                           |  | 2008                               |        |                    | 2007  |  
|                                           |  | Amount                             |        | Percent ofRevenues |       |   | Amount |   | Percent ofRevenues | 
|Revenue:                                   |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Subscription revenue                       |  | $                                  | 39,156 |                    | 81.2  | % |        | $ | 34,687             |  | 82.2  | %
|Other revenue                              |  |                                    | 9,051  |                    | 18.8  | % |        |   | 7,530              |  | 17.8  | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Total revenue                              |  |                                    | 48,207 |                    | 100.0 | % |        |   | 42,217             |  | 100.0 | %
|Cost of revenue                            |  |                                    | 13,105 |                    | 27.2  | % |        |   | 11,432             |  | 27.1  | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Gross profit                               |  |                                    | 35,102 |                    | 72.8  | % |        |   | 30,785             |  | 72.9  | %
|Operating expenses:                        |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Sales and marketing                        |  |                                    | 9,889  |                    | 20.5  | % |        |   | 8,230              |  | 19.5  | %
|General and administrative                 |  |                                    | 11,993 |                    | 24.9  | % |        |   | 9,672              |  | 22.9  | %
|Research and development                   |  |                                    | 4,542  |                    | 9.4   | % |        |   | 4,323              |  | 10.2  | %
|Depreciation and amortization              |  |                                    | 2,151  |                    | 4.5   | % |        |   | 1,430              |  | 3.4   | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Total operating expenses                   |  |                                    | 28,575 |                    | 59.3  | % |        |   | 23,655             |  | 56.0  | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Income from operations                     |  |                                    | 6,527  |                    | 13.5  | % |        |   | 7,130              |  | 16.9  | %
|Interest income, net                       |  |                                    | 641    |                    | 1.3   | % |        |   | 123                |  | 0.3   | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Income from operations before income taxes |  |                                    | 7,168  |                    | 14.9  | % |        |   | 7,253              |  | 17.2  | %
|Income tax expense                         |  |                                    | 2,394  |                    | 5.0   | % |        |   | 2,558              |  | 6.1   | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  
|Net income                                 |  | $                                  | 4,774  |                    | 9.9   | % |        | $ | 4,695              |  | 11.1  | %
|                                           |  |                                    |        |                    |       |   |        |   |                    |  |       |  



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##### Table of Contents

Revenue

Total revenue increased by $6.0 million or 14% to $48.2 million during the three months ended March 31, 2008 compared to the same period in 2007. Our subscription revenue increased by $4.5 million or 13% to $39.2
million during the three months ended March 31, 2008 compared to the same period in 2007. Subscription revenue represented approximately 81% of our revenue for the three months ended March 31, 2008. Our other revenue increased by $1.5
million or 20% to $9.0 million for the three months ended March 31, 2008 compared to the same period in 2007. The increase in our revenues for the quarter ended March 31, 2008, as compared to the same period in 2007, is attributable to an
increase in hiring, retention and other products and services totaling $4.1 million, $2.8 million and $0.6 million, respectively, partially offset by a decrease due to the loss of one customer totaling $1.5 million. For the remainder of the year we
expect subscription-based revenue and other revenue to increase from the prior year due to customer acquisitions and additional sales to existing customers.

Cost of Revenue

Our cost of revenue primarily consists of compensation, employee benefits and travel-related
expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting costs, amortization of third-party license royalty costs, technical support personnel
costs, allocated overhead and reimbursed expenses are also recorded as cost of revenue. Many factors affect our cost of revenue, including changes in the mix of products and services, pricing trends, changes in the amount of reimbursed expenses and
fluctuations in our client base. Because cost as a percentage of revenue is higher for professional services than for software products, an increase in the services component of our solutions or an increase in discrete professional services as a
percentage of our total revenue would reduce gross profit as a percentage of total revenue. As our business expands, we expect that third-party license royalty costs and personnel costs associated with the delivery of our solutions will continue to
fall within a range of approximately 26% to 30% of revenue.

Cost of revenue increased by $1.7 million or 15% to $13.1 million for the
three months ended March 31, 2008 compared to the same period in 2007. The addition of 195 employees, primarily brought on by our recent acquisitions contributed approximately $1.6 million to the cost of revenue increase for the three
months ended March 31, 2008 compared to the prior year. Additionally, other consulting and external services needed to support our customers requirements added approximately $0.1 million to the increase during the quarter ended
March 31, 2008. As a percentage of revenue, cost of revenue remained the same at approximately 27% for the three months ended March 31, 2008 and 2007.

Sales and Marketing (S&M) Expense

S&M expense primarily consists of personnel and related costs
for employees engaged in sales and marketing, including salaries, commissions and other variable compensation, travel expenses and costs associated with trade shows, advertising and other marketing efforts and allocated overhead. We expense our
sales commissions at the time the related revenue is recognized, and we recognize revenue from our subscription agreements ratably over the term of the agreements. Investment in sales and marketing commencing in 2003 resulted in significant revenue
growth during 2004 through 2007. We intend to continue to invest in sales and marketing to pursue new clients and expand relationships with existing clients. As a result, we expect S&M expense to increase in total dollars and as a percentage of
revenue for the next twelve months.

S&M expense increased by $1.7 million or 20% to $9.9 million for the three months ended
March 31, 2008 compared to the same period in 2007. Increased salary, bonus and bad debt expenses contributed approximately $0.9 million, $0.3 million and $0.5 million, respectively, to the increase in S&M expense during the quarter ended
March 31, 2008 compared to the prior year. The increase in salary expense was attributable to the addition of 53 employees to support our increased sales efforts. As a percentage of revenue, S&M expense increased from 20% to 21% for the
three months ended March 31, 2008 compared to the same period in 2007 due to increased expense.



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##### Table of Contents

General and Administrative (G&A) Expense

G&A expense primarily consists of personnel and related costs for our executive, finance, human resources and administrative personnel, professional
fees and other corporate expenses and allocated overhead. As we expand our business and incur additional expenses associated with being a public company, including the costs of compliance with the Sarbanes-Oxley Act of 2002 and other regulations
governing public companies, we believe that G&A expense will increase in dollar amount and may increase as a percentage of revenue in 2008 and future periods.

G&A expense increased by $2.3 million or 24% to $12.0 million for the three months ended March 31, 2008 compared to the same period in 2007. The $2.3 million increase for the quarter ended March 31, 2008
was due primarily to an increase in staff-related expenses including salary, bonus, and stock compensation expense of $0.3 million, $0.2 million, and $0.9 million, respectively. In addition professional fees and other expenses contributed $0.5
million and $0.4 million, respectively, to the increase during the quarter ended March 31, 2008 compared to the prior year. As a percentage of revenue, G&A expense increased from 23% to 25% for the three months ended March 31, 2008
compared to the same period in 2007 due to increased expense.

Research and Development (R&D) Expense

R&D expense primarily consists of personnel and related costs, including salaries and employee benefits for software engineers, quality assurance
engineers, product managers, technical sales engineers and management information systems personnel. Our R&D efforts have been devoted primarily to new product offerings and incidental enhancements and upgrades to our existing products.
Historically, we have capitalized a small percentage of our R&D expense. Capitalized R&D expense totaled $2.2 million and $0.2 million for the three months ended March 31, 2008 and 2007, respectively. The remaining R&D expense has
been expensed as incurred. We expect R&D expense to increase in the future as we employ more personnel to support enhancements of our solutions and new solutions offerings. However, we expect R&D expense to decrease as a percentage of
revenue primarily due to increased efficiencies from our global development center.

R&D expense increased by $0.2 million or 5% to
$4.5 million for the three months ended March 31, 2008 compared to the same period in 2007. The $0.2 million increase in R&D expense for the three months ended March 31, 2008 was primarily due to additional developers hired to support
product development. As a percentage of revenue, R&D expense decreased from 10% to 9% for the three months ended March 31, 2008 compared to the same period in 2007.

Depreciation and Amortization

Depreciation and amortization expense increased by $0.7 million
or 50% to 2.1 million for the three months ended March 31, 2008, compared to the same period in 2007, primarily due to software development and building costs. In the future, we expect depreciation and amortization expense to increase due an
increase in capital purchases.

Income tax expense on operations

Income tax expense on operations decreased by $0.2 million or 6% to 2.4 million for the three months ended March 31, 2008 compared to the same period
in 2007. The decrease in expense was due to a larger portion of our taxable income being generated in jurisdictions with lower effective tax rates and decreasing in jurisdictions with higher tax rates.



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##### Table of Contents

6. Liquidity and Capital Resources

Since our formation in 1987, we have financed our operations primarily through internally generated cash flows, our line of credit and the issuance of preferred and common stock. As of March 31, 2008, we had cash
and cash equivalents of $39.4 million and short term investments of $7.5 million.

Our cash provided from operations was $3.6 million and
$6.2 million for the three months ended March 31, 2008 and 2007, respectively. Cash provided by investing activities was $21.9 million for the three months ended March 31, 2008 and cash used in investing activities was $82.3 million for
the three months ended March 31, 2007. Cash used in financing activities was $24.2 million for the three months ended March 31, 2008 and cash provided by financing activities was $66.7 million for the three months ended March 31,
2007. Our net increase in cash and cash equivalents was $1.3 million for the three months ended March 31, 2008, resulting primarily from our operating activities, and our net decrease in cash and cash equivalents was $9.4 million for the three
months ended March 31, 2007, resulting primarily from our investment in short-term investments. We expect positive cash flow to continue in future periods.

In connection with our November 8, 2007 and February 20, 2008 stock repurchase plans we repurchased 1,316,009 shares of our common stock at an average price of $18.66 per share and an aggregate cost of $24.6
million for the three months ended March 31, 2008.

On March 26, 2007, we entered into a First Amendment to Credit
Agreement with PNC Bank. The Amendment increased the maximum amount available under the revolving credit facility portion of the Credit Agreement from $25 million to $50 million, including a sublimit of up to $2 million for letters of
credit. The First Amendment to the Credit Agreement provides that the Credit Agreement will terminate, and all borrowings will become due and payable, on March 26, 2010.

Operating Activities

Net cash provided by operating activities was $3.6 million and $6.2
million for the three months ended March 31, 2008 and 2007, respectively. Net cash provided by operating activities for the three months ended March 31, 2008 resulted primarily from net income of approximately $4.8 million, non-cash
charges to net income of $4.0 million, and an increase in deferred revenue of $2.4 million, partially offset by changes in working capital of $4.2 million, and increase in accounts receivable of $3.3 million and a $0.1 million reduction in taxes
payable resulting from the excess tax benefits from share based payments. Net cash provided by operating activities for the three months ended March 31, 2007 primarily resulted from net income of approximately $4.7 million, non-cash charges to
net income of $2.7 million, a decrease in accounts receivables of $1.4 million and an increase in deferred revenue of $0.4 million, partially offset by changes in working capital of $2.7 million and a $0.3 million reduction in taxes payable
resulting from the excess tax benefits from share based payments.

Investing Activities

Net cash provided by and used in investing activities was $21.9 million and $82.3 million for the three months ended March 31, 2008 and 2007,
respectively. Cash flows from investing activities for the three months ended March 31, 2008 and 2007 consisted of the following:



|                                                            |  |                                         |       |   |                                         |   |     
|----------------------------------------------------------- |  | --------------------------------------- | ----- | - | --------------------------------------- | - | ----
|                                                            |  | For the threemonths endedMarch 31, 2008 |       |   | For the threemonths endedMarch 31, 2007
|Scottworks acquisition                                      |  | $                                       | 0.1   |   |                                         | $ |    
|Gantz Wiley Research acquisition                            |  |                                         |      |   |                                         |   | 0.6 
|BrassRing acquisition                                       |  |                                         |      |   |                                         |   | 0.1 
|PSL acquisition                                             |  |                                         |      |   |                                         |   | 0.3 
|StraightSource acquisition                                  |  |                                         | 1.1   |   |                                         |   |    
|HRC acquisition                                             |  |                                         | 0.1   |   |                                         |   |    
|Capitalized software and purchases of computer hardware     |  |                                         | 5.6   |   |                                         |   | 2.7 
|Purchases of available-for-sale investments                 |  |                                         | 16.3  |   |                                         |   | 78.6
|Sales of available-for-sale investments                     |  |                                         | (45.1 | ) |                                         |   |    
|                                                            |  |                                         |       |   |                                         |   |     
|Total Cash flows (provided by) used in investing activities |  | $                                       | (21.9 | ) |                                         | $ | 82.3
|                                                            |  |                                         |       |   |                                         |   |     

In the future, we expect our capital expenditures to increase as revenues increase and business
needs arise.



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Financing Activities

Net cash used in and provided by financing activities was $24.2 million and $66.7 million for the three months ended March 31, 2008 and 2007, respectively. For the three months ended March 31, 2008, net cash
used in financing activity consisted of repurchases of our common shares of $24.6, partially offset by net proceeds from stock option exercises of $0.2 million, excess tax benefits from share-based payment arrangements of $0.1 million and proceeds
from our employee stock purchase plan of $0.1million. For the three months ended March 31, 2007, net cash provided by financing activity consisted of net proceeds from our public offering of $131.1 million, net proceeds from stock option
exercises of $0.4 million and excess tax benefits from share-based payment arrangements of $0.4 million, partially offset by the repayment of our credit facility of $65.0 million, capital lease obligations of $0.1 million and deferred financing
costs of $0.1 million.

We believe that our cash and cash equivalent balances and cash flows from operations will be sufficient to satisfy
our working capital and capital expenditure requirements for at least the next 12 months. We intend to continue to invest our cash in excess of current operating requirements in interest-bearing, investment-grade securities. Changes in our operating
plans, lower than anticipated revenue, increased expenses or other events, may cause us to seek additional debt or equity financing. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could
negatively impact our growth plans and our financial condition and consolidated results of operations. Additional equity financing would be dilutive to the holders of our common stock, and debt financing, if available, may involve significant cash
payment obligations and covenants or financial ratios that restrict our ability to operate our business.

Our short term and long-term investments consist
of auction rate securities (ARS) and municipal securities with balances as of March 31, 2008 and December 31, 2007 as follows (in millions):



|                             |  |               |      |         |     |   |                  |   |         |  |     |  
|---------------------------- |  | ------------- | ---- | ------- | --- | - | ---------------- | - | ------- |  | --- | -
|Type of Investment           |  | March 31,2008 |      | % total |     |   | December 31,2007 |   | % total | 
|Short term investments:      |  |               |      |         |     |   |                  |   |         |  |     |  
|Municipal bonds              |  |               | 7.5  |         | 26  | % |                  |   | 28.5    |  | 49  | %
|Auction rate securities      |  |               |     |         |    |   |                  |   | 29.9    |  | 51  | %
|                             |  |               |      |         |     |   |                  |   |         |  |     |  
|Total short term investments |  |               | 7.5  |         | 26  | % |                  |   | 58.4    |  | 100 | %
|                             |  |               |      |         |     |   |                  |   |         |  |     |  
|Long term investments:       |  |               |      |         |     |   |                  |   |         |  |     |  
|Auction rate securities      |  |               | 21.3 |         | 74  | % |                  |   |        |  |    |  
|                             |  |               |      |         |     |   |                  |   |         |  |     |  
|Total investments            |  | $             | 28.8 |         | 100 | % |                  | $ | 58.4    |  | 100 | %
|                             |  |               |      |         |     |   |                  |   |         |  |     |  

Our ARS investments are intended to provide liquidity via an auction process that resets the
applicable interest rate in the event there is no new investment in these securities. Due to recent uncertainty in the credit markets some of our holdings in our ARS investment portfolio have failed to settle on their respective settlement dates
resulting in illiquidity in these investments. Consequently, we have not been able to access these funds and do not expect to do so until a future auction of these investments is successful or a buyer is found outside the auction process. Although
the maturity dates of the underlying securities of our ARS investments range from 4 to 31 years, we currently have sufficient cash and cash equivalents, cash from operations and access to unused credit facilities to meet our short term liquidity
requirements and do not anticipate that we will need to access our ARS investments for additional liquidity.

As a result of the changes in
the ARS market we have adjusted the fair value of our ARS investment portfolio using a discounted cash flow model to determine the estimated fair value of our ARS investments as of March 31, 2008. The assumptions used in preparing the
discounted cash flow model include level three inputs, as defined in SFAS No. 157, Fair Value Measurements, such as estimates for interest rates, the amount of cash flows and an expected holding period of the ARS. Based upon our assessment, the
fair value of our ARS investments declined approximately $1.0 million for the three months ended March 31, 2008 to $21.3 million, which was deemed temporary and was recognized in accumulated other comprehensive income (loss). In the future we
will continue to monitor the ARS market and depending upon market conditions and our own cash requirements may record additional temporary losses if appropriate.



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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and consolidated results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to uncollectible accounts receivable and accrued expenses. We base these estimates
on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Our actual results may differ from these estimates.

We believe that the following critical accounting
policies affect our more significant estimates and judgments used in the preparation of our consolidated financial statements:

Revenue Recognition

We derive our revenue from two sources: (1) subscription revenues for solutions, which are comprised of subscription fees from
clients accessing our on-demand software, consulting services, outsourcing services and proprietary content, and from clients purchasing additional support beyond the standard support that is included in the basic subscription fee; and
(2) other fees for discrete professional services. Because we provide our solutions as a service, we follow the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101,Revenue Recognition in Financial
Statements, as amended by Staff Accounting Bulletin No. 104,Revenue Recognition. On August 1, 2003, we adopted Emerging Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables. We recognize
revenue when all of the following conditions are met:



| |  |  | There is persuasive evidence of an arrangement;
| | - |  | -----------------------------------------------



| |  |  | The service has been provided to the client;
| | - |  | --------------------------------------------



| |  |  | The collection of the fees is probable; and
| | - |  | -------------------------------------------



| |  |  | The amount of fees to be paid by the customer is fixed or determinable.
| | - |  | -----------------------------------------------------------------------

Subscription fees and support revenues are recognized on a monthly basis over the terms of the contracts. Amounts that have been invoiced are recorded in
accounts receivable or in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.



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##### Table of Contents

Discrete professional services, when sold with subscription and support offerings, are accounted for
separately since these services have value to the customer on a stand-alone basis and there is objective and reliable evidence of fair value of the delivered elements. Our arrangements do not contain general rights of return. Additionally, when
professional services are sold with other elements, the consideration from the revenue arrangement is allocated among the separate elements based upon the relative fair value. Revenues from professional services are recognized as the services are
rendered.

In determining whether revenues from professional services can be accounted for separately from subscription revenue, we
consider the following factors for each agreement: availability of professional services from other vendors, whether objective and reliable evidence of the fair value exists of the undelivered elements, the nature and the timing of the agreement
execution in comparison to the subscription agreement start date and the contractual dependence of the subscription service on the customers satisfaction with the other services. If the professional service does not qualify for separate
accounting, we recognize the revenue ratably over the remaining term of the subscription contract. In these situations we defer the direct and incremental costs of the professional service over the same period as the revenue is recognized.

We record out-of-pocket expenses incurred in accordance with EITF issue 01-14, Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred, which requires that reimbursements received for out-of-pocket expenses be classified as revenue and not as cost reductions. Before the December 15, 2001 effective date of EITF Issue
01-14, out-of-pocket reimbursements from clients were netted with the applicable costs. These items primarily include travel, meals and certain telecommunication costs. For the three months ended March 31, 2008, reimbursed expenses totaled $0.6
million.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from clients inability to pay us. The provision is based on our historical experience and for specific clients that, in our opinion,
are likely to default on our receivables from them. In order to identify these clients, we perform ongoing reviews of all clients that have breached their payment terms, as well as those that have filed for bankruptcy or for whom information has
become available indicating a significant risk of non-recoverability. In addition, we have experienced significant growth in number of clients, and we have less payment history to rely upon with these clients. We rely on historical trends of bad
debt as a percentage of total revenue and apply these percentages to the accounts receivable associated with new clients and evaluate these clients over time. To the extent that our future collections differ from our assumptions based on historical
experience, the amount of our bad debt and allowance recorded may be different.



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Capitalized Software Research and Development Costs

In accordance with EITF Issue 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on
Another Entitys Hardware, we apply AICPA Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The costs incurred in the preliminary stages of development are expensed
as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, will be capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon
completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred.
Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairments whenever events or changes in
circumstances occur that could impact the recoverability of these assets. There were no impairments to internal software in any of the periods covered in this report.

Goodwill and Other Identified Intangible Asset Impairment

On January 1, 2002, we adopted
SFAS No. 142,Goodwill and Other Intangible Assets which superseded Accounting Board Opinion No. 17,Intangible Assets.Upon adoption of SFAS No. 142, we ceased amortization of existing goodwill and are required to
review the carrying value of goodwill for impairment. If goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. This comparison is performed annually or more frequently if circumstances indicate that
the carrying value may not be recoverable. We have reviewed the carrying values of goodwill of each business unit by comparing the carrying values to the estimated fair values of the business components. The fair value is based on managements
estimate of the future discounted cash flows to be generated by the respective business components and comparable company multiples. Such cash flows consider factors such as future operating income, historical trends, as well as demand and
competition. Comparable company multiples are based upon public companies in sectors relevant to our business based on our knowledge of the industry. Changes in the underlying business could affect these estimates, which in turn could affect the
recoverability of goodwill. Through March 31, 2008, we have not observed any changes to our business units which would lead us to believe that our goodwill or other identified intangibles carrying value exceeds their fair values.

Accounting for Stock-Based Compensation

We use a Black-Scholes option-pricing model to calculate the fair value of our stock awards. The calculation of the fair value of the awards using the Black-Scholes option-pricing model is affected by our stock price on the date of grant as
well as assumptions regarding the following:



| |  |  | Volatility is a measure of the amount by which the stock price is expected to fluctuate each year during the expected life of the award and is based on a weighted
average of peer companies, comparable indices and our stock volatility. An increase in the volatility would result in an increase in our expense.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The expected term represents the period of time that awards granted are expected to be outstanding and is currently based upon an average of the contractual life
and the vesting period of the options. With the passage of time actual behavioral patterns surrounding the expected term will replace the current methodology. Changes in the future exercise behavior of employees or in the vesting period of the award
could result in a change in the expected term. An increase in the expected term would result in an increase to our expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The risk-free interest rate is based on the U.S. Treasury yield curve in effect at time of grant. An increase in the risk-free interest rate would result in an
increase in our expense.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock-based compensation expense recognized during the period is based on the value of the
number of awards that are expected to vest. In determining the stock-based compensation expense to be recognized, a forfeiture rate is applied to the fair value of the award. This rate represents the number of awards that are expected to be
forfeited prior to vesting and is based on Kenexas employee historical behavior. Changes in the future behavior of employees could impact this rate. A decrease in this rate would result in an increase in our expense.



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Accounting for Income Taxes

We account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes, or SFAS 109, which requires that deferred tax assets and liabilities be recognized using enacted tax
rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of
all of the deferred tax asset will not be realized.

The realization of the deferred tax assets is evaluated quarterly by assessing the
valuation allowance and by adjusting the amount of the allowance, if necessary. The factors used to assess the likelihood of realization are the forecast of future taxable income and available tax planning strategies that could be implemented to
realize the net deferred tax assets. We have used tax-planning strategies to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits.

In addition, we operate within multiple taxing jurisdictions and are subject to audit in each jurisdiction. These audits can involve complex issues that
may require an extended period of time to resolve. In our opinion, adequate provisions for income taxes have been made for all periods.

Self-Insurance

We are self-insured for the majority of our health insurance costs, including claims filed and claims
incurred but not reported subject to certain stop-loss provisions. We estimate our liability based upon managements judgment and historical experience. We also rely on the advice of consulting administrators in determining an adequate
liability reserve for self-insurance claims. For the three months ended March 31, 2008 our self-insurance accrual totaled $0.6 million. We continuously review the adequacy of our insurance coverage. Material differences may result in the amount
and timing of insurance expense if actual experience differs significantly from managements estimates.



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|Item 3: | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign
currency exchange rates. We do not hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk

For the three months ended March 31, 2008, approximately 78.4% of our total revenue was comprised of sales to clients in the United States. A key
component of our business strategy is to expand our international sales efforts, which will expose us to foreign currency exchange rate fluctuations. A 10% change in the value of the U.S. dollar relative to each of the currencies of our
non-U.S-generated sales would not have resulted in a material change to our results. As of March 31, 2008, we were not engaged in any foreign currency hedging activities.

The financial position and operating results of our foreign operations are consolidated using the local currency as the functional currency. Local
currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date, and the local currency revenue and expenses are translated at average rates of exchange to the U.S. dollar during the period. The
related translation adjustments were approximately $0.1 million for the three months ended March 31, 2008, and are included in accumulated other comprehensive income.The foreign currency translation adjustment is not adjusted for income
taxes as it relates to an indefinite investment in a non-U.S. subsidiary.

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the
securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our
portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. Our cash equivalents, which consist
solely of money market funds, are not subject to market risk because the interest paid on these funds fluctuates with the prevailing interest rate. We do not believe that a 10% change in interest rates would have a significant effect on our interest
income.



|Item 4: | Controls and Procedures
|------- | -----------------------

Under the supervision of
and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report, or the Evaluation Date. Based upon the evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of the Evaluation Date. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the
Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with this evaluation, our management identified no changes in our internal control over financial reporting that occurred during the most
recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II: OTHER INFORMATION



|Item 1: | Legal Proceedings
|------- | -----------------

We are involved in claims which
arise in the ordinary course of business. In the opinion of management, we have made adequate provision for potential liabilities, if any, arising from any such matters. However, litigation is inherently unpredictable, and the costs and other
effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in any such matters, and developments or
assertions by or against us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our business, financial condition and operating results.



|Item 1A: | Risk Factors
|-------- | ------------

In addition to the other information
set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2007 which could materially affect our business,
financial condition or future results of operations. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2007 are not the only risks that we face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially adversely affect our business, financial condition and future results of operations. There have been no material changes from the risk factors previously disclosed in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2007.



|Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Issuer Purchases of Equity Securities.

The following table provides information regarding our repurchase of our
common stock during the first quarter of 2008:



|                                        |  |                                |  |                                     |       |                                                                              |           |                                                                             |           |    
|--------------------------------------- |  | ------------------------------ |  | ----------------------------------- | ----- | ---------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------- | --------- | ---
|Period                                  |  | Total Number ofSharesPurchased |  | Weighted AveragePrice paid PerShare |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs |           | Maximum Number ofShares that May YetBe Purchased Underthe Plans or Programs |          
|January 1, 2008  January 31, 2008(1)   |  | 551,909                        |  | $                                   | 17.79 |                                                                              | 551,909   |                                                                             |          |    
|February 1, 2008  February 29, 2008(2) |  | 230,300                        |  | $                                   | 21.71 |                                                                              | 230,300   |                                                                             | 2,769,700 |    
|March 1, 2008  March 31, 2008          |  | 533,800                        |  | $                                   | 18.24 |                                                                              | 533,800   |                                                                             | 2,235,900 |    
|                                        |  |                                |  |                                     |       |                                                                              |           |                                                                             |           |    
|Total                                   |  | 1,316,009                      |  | $                                   | 18.66 |                                                                              | 1,316,009 |                                                                             | 2,235,900 | (3)
|                                        |  |                                |  |                                     |       |                                                                              |           |                                                                             |           |    



|(1) | On November 8, 2007, our board of directors authorized a stock repurchase plan providing for the repurchase of up to 2 million shares of our common stock. As of
December 31, 2007, 1,448,091 shares were repurchased. The remaining 551,909 shares available for repurchase under the stock repurchase plan were repurchased in January 2008.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On February 20, 2008, our board of directors authorized another stock repurchase plan providing for the repurchase of up 3 million shares of our common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As of May 8, 2008, we repurchased 292,193 shares available for repurchase pursuant to our repurchase plan approved by our board of directors on February 20, 2008 with a
weighted average price per share of $17.89, bringing the number of shares available for repurchase to 1,943,707.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 3: | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



|Item 4: | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not applicable.



|Item 5: | Other Information
|------- | -----------------

Not applicable.



|Item 6: | Exhibits
|------- | --------

The following exhibits are filed
herewith:

31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1 Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

May 12, 2008

Kenexa Corporation



|                                                 
|-------------------------------------------------
|/s/ Nooruddin S. Karsan                          
|Nooruddin S. Karsan                              
|Chairman of the Board and Chief Executive Officer
|                                                 
|/s/ Donald F. Volk                               
|Donald F. Volk                                   
|Chief Financial Officer                          



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EXHIBIT INDEX

Exhibit Number and Description



|             |  |                                                                                                                                 
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).                                                  
|             | 
|Exhibit 31.2 |  | Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).                                                  
|             | 
|Exhibit 32.1 |  | Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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